Commodity option trading has come a long way from the days when hog sellers and buyers met at an open auction and placed bids. Once called hedgers, the people in the transaction actually took possession of the commodity or had a direct business interest.

Computerized Markets that Turned Everything into Commodities

Today commodities in commodity option trading are bought and sold in slick computerized markets where buyers and sellers usually don’t meet. Commodities include just about anything you can think of too including agricultural, minerals, metals, weather, foreign currencies, financial products, energy and food. And hedging has become a strategy where a single trader buys and sells options to minimize risk.

Trading Derivatives

With the advent of the Great Recession, the term “derivative” became a bit of a dirty word after the housing market collapsed. But commodity option trading is actually trading derivative contracts. Derivatives are merely contracts that have an underlying asset, but it is the contract that is originally bought and sold. The contract outlines the agreement for the exchange of the commodity should the contract be exercised.

Derivatives are also called futures. Commodity option trading involves futures contracts that are anticipating a price on the underlying asset by a certain point in the future which is the expiration date. The option is the contract while the price is the rate at which the option can be exercised.  When you are doing commodity option trading, an exercised option is replaced with a futures position meaning the option has been exercised into an underlying futures contract.